"An independent Scotland needs an independent currency"

PUBLISHED: 14 Feb 2014

AUTHOR: Justine Brian & Craig Fairnington

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INTRODUCTION

In a visit to the Isle of Man in July 2013, First Minister Alex Salmond confirmed that he believed an independent Scotland should retain the pound within a formal currency union with the rest of the United Kingdom. This proposal was further cemented with the publication of the Referendum White Paper in November, which confirmed plans to retain the pound – describing it as the best option for an independent Scotland and for the rest of the UK [Ref: STV]. However a number of people from the No campaign have suggested otherwise - the UK Chancellor George Osborne describing currency union as “less suitable” to the current set up both for Scotland and for the rest of the UK [Ref: STV]. Others from both sides of the referendum debate question the freedom an independent Scotland would have to decide its own fiscal policy should it seek to form a currency union with the rest of the UK. The Scottish Green Party, who support independence, also support the adoption of a new independent currency, arguing that only by doing this can Scotland have full control over economic policy [Ref: Scotsman]. From the No side, Alex Massie suggests that “remaining subject to the Bank of England must diminish Scotland’s real independence” [Ref: Think Scotland]. The currency an independent Scotland chooses to use will have profound effects on how it would trade with the rest of the UK and with the wider world, and how much fiscal autonomy a Scottish government would have to control its own monetary affairs.

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DEBATE IN CONTEXT

This section provides a summary of the key issues in the debate, set in the context of recent discussions and the competing positions that have been adopted.

The Pound: Scotland’s Currency
“The pound is Scotland’s currency just as much as it is the rest of the UK’s.” [Ref: White Paper] and for the Scottish Government, continuing to use the pound as part of a formal Sterling Area would be the best solution for both Scotland and the rest of the UK (rUK) – agreeing with the findings of the expert Fiscal Commission Working Group [Ref: Scottish Government]. This would help retain the extremely strong trading links Scotland and the rest of the UK share, and so would be in both countries’ interests. Despite what some from the No campaign have suggested, there is no possibility of the rest of the UK preventing Scotland from continuing to use the pound [Ref: Scotsman] and it would serve rUK’s interests to form a mutual agreement over a Sterling Area – Alex Salmond describing George Osborne’s hypothetical attempts to deny Scotland the right to use the pound as “cutting off his nose to spite his face” [Ref: SNP]. Large revenues from oil & gas in Scotland and from other international exports would help strengthen the pound, so it would be in the rest of the UK’s interest to negotiate and keep Scotland within the Sterling Area. The Scottish Government estimates, too, that the rest of the UK exports £59 billion to Scotland in 2012. Maintaining this, and the jobs dependent on those exports, are further reason monetary union makes sense. The Bank of England would continue to act as the central bank for Scotland, setting monetary policy that would suit the whole of the monetary area. Scotland would have a say in these policy decisions through a shareholder agreement with the rest of the UK [Ref: Scottish Government].

How independent?
Critics of retaining the pound come from both sides of the referendum debate. For the Yes supporting Scottish Green Party, while they may consider support for a Sterling Area as a short-term step, an independent Scotland’s economic priorities would be reasonably expected to diverge from the rest of the UK, making a separate currency an attractive prospect [Ref: Patrick Harvie]. A motion passed at their conference in October 2013 reinforced this, arguing that control over currency was vital for Scotland to exercise as much control over its economic policy as possible [Ref: Scotsman]. The Scottish Secretary Alastair Carmichael has questioned the idea that a currency union would work, arguing that it needs political integration as members of the Eurozone are now arguing in the aftermath of the collapse of the Greek economy in particular. Since the point of Scottish independence is to break political integration with the rest of the UK, he argues, the whole notion of a sterling union is contradictory [Ref: STV]. Others have questioned the extent to which an independent Scotland would be able to exercise influence over the Bank of England, which would control its monetary policy, with the National Institute of Economic and Social Research questioning how the Bank of England would share responsibility to both countries when the rest of the UK represents 10 times the population of Scotland [Ref: Channel 4]. A recent speech by the governor of the Bank of England, Mark Carney, stressed that any arrangements would be between the Scottish and UK parliaments, but that the Bank of England would implement any decisions reached. The SNP hailed this as an endorsement of their plans, which undermined warnings from the No campaign about the use of the currency [Ref: SNP]. Others, however, pointed to Mark Carney’s remarks about seceding sovereignty in order to make a union work, which was seen as unworkable both from the point of view of Scotland [Ref: Edinburgh Evening News] and of the remainder of the UK [Ref: Financial Times]. The House of Lords has said that it would be unacceptable for the Bank of England’s Monetary Policy Committee to have members representing the interests of a separate country [Ref: House of Lords]. In order to protect its own interests, the UK may be likely to seek strict budgetary and debt constraints – this would limit the decisions an independent Scotland would be able to make [Ref: Financial Times].

Lessons of the Euro
The Scottish Government point out that countries around the world share currencies. France, Germany and the Netherlands all share a currency, yet retain control over their own resources and taxation policies[Ref: Scottish Government] and are considered independent. Others argue against the assumption that Scotland would be a weaker partner in the Sterling Zone, suggesting that a small country with significant natural resources would be in a strong negotiating position [Ref: Herald]. For some, the comparison to the Euro is a warning for an independent Scotland, arguing that for example, Ireland’s economy has suffered due to its inability to make adjustments to its currency due to its being part of the Eurozone [Ref: MoneyWeek]. Once popular with the SNP as an option for independent Scotland, joining the Euro has fallen out of favour due to the crisis it has faced. Alastair Carmichael argues that monetary unions work best with political union. The EU has many within it seeking this kind of political union, partly as a response to the monetary issues [Ref: Telegraph]. Rather like a sterling union, this seems opposite to the goals of the independence movement, and may strengthen the case for Scotland using an independent currency should Scotland become independent.

ESSENTIAL READING

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KEY TERMS

Definitions of key concepts that are crucial for understanding the topic. Students should be familiar with these terms and the different ways in which they are used and interpreted and should be prepared to explain their significance.

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